CRM : NYSE : US$52.89

Target: US$65.00

Technology — Enterprise Software — Software as a Service
Investment thesis
We would build or expand positions in CRM shares because we believe this firm
has the highest quality franchise among cloud software firms we follow.
Meanwhile the stock’s valuation looks reasonable at 35x 2015E EV/FCF for a
25-30% grower.
Investment highlights
 Salesforce posts another upside quarter. CRM reported Q1/15 revenues and
non-GAAP EPS of $1.227B and $0.11, which were respectively $17M and a
penny ahead of our estimates. Revenues grew 37% in the quarter, and
calculated billings of $1.03B were nicely ahead of our $995M estimate and
up 35% compared to a year ago. Total backlog (billed and unbilled) ended
the quarter at $7.1B, which is up 34% versus Q1/14. Lastly, CRM generated
FCF of $413M (+80% y-o-y), or $0.64 per share, which was well ahead of
our $0.49 estimate in the firm’s seasonally strong cash collection period.
 Outlook: F2015 ranges increased again. CRM increased its F2015 revenue
and non-GAAP EPS outlook by ~$50M and a penny. The firm expects to
deliver 125-150 bps of operating leverage (to somewhere in the 10-11%
range) and deliver operating cash flow growth in the mid-20% range. Our
new F2015 revenue and FCF estimates of $5.3B and $802M are up roughly
$55M and $30M respectively and imply 31% growth and 15% FCF margin.
Valuation and price target
We are slightly lowering our CRM price target to reflect the broader valuation
correction in cloud software. Our new $65 target is based on a 6.3x EV/revenue
multiple and 40x EV/FCF based on our F2016/C2015 estimates plus roughly
$1.2B in prospective net cash and assuming ~650M shares outstanding



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